Owning a trucking company can be very profitable, but only if you follow the right growth strategy. This article covers the areas that are most important to successfully growing your trucking company:
- Select the right industry and equipment
- Determine per-mile costs and rates
- Find high-paying loads
- Manage cash effectively
- How to finance growth
1. Start with the right industry and equipment
The first and most important decision you can make as a trucking company owner is choosing the right industry to support. The choice of industry drives your equipment selection. These decisions determine who your clients are, your driving lanes, your competitors, and the profits you can eventually make. Let’s look at an example.
a) Dry van
Let’s assume an owner-operator chooses to haul dry van because it’s the type of service that most industries require. These loads are the most common, easiest to handle, and have the most potential customers. As you can imagine, new truckers prefer to pull these loads. However, these truckers will also find that competition for these loads is high and tend to pay the lowest rates per mile.
b) Specialized loads
The alternative is to focus on specialized loads such as refrigerated, oversized, flatbed, or fluids. These loads require specialized skills and/or equipment. However, these loads usually pay higher rates per mile. There is less demand for these loads but also fewer providers.
Consider focusing on the need of companies near your base of operations. For example, western Canada has a concentration of companies that work with natural resources. British Columbia has a healthy logging industry that needs hauling services. Likewise, Alberta and Saskatchewan are well known for having companies in the oilfield services industry that also need hauling services. Each province and industry has its own set of specialized service needs that truckers can focus on.
2. Determine per-mile rates and costs
You must know two figures very well to grow your trucking business successfully. They are your cost per mile and your rate per mile. The difference between these two figures determines your profit. Not knowing your costs or charging the wrong rates can put you in a position to pull loads at a loss. This situation will drive your trucking company out of business quickly.
Determining your costs and rates can be challenging for new owner-operators. We suggest you work with a competent financial specialist to help you with the right cost and rate structures.
a) Cost per mile
The cost per mile for a trucking company blends all the fixed and variable expenses over the number of miles you expect to drive that year. Given that it is an estimate, we suggest you add a financial cushion to it as a margin of safety. To calculate your cost per mile, you must determine your fixed expenses, variable expenses, and the number of miles you plan to drive per month.
Fixed expenses are costs that don’t change and must be paid regardless of the miles you drive. These include rent, truck payments, trailer payments, insurance expenses, permits, etc. Variable expenses are costs related to the number of miles you drive. The increase or decrease is based on how much you drive in a given month. Examples of variable expenses include fuel, tires, and repairs.
The last item of information you need to calculate your cost per mile is the number of miles you plan to drive in a month. This figure must include compensated and deadhead miles.
Once you have this information, build your expected cost per mile by blending the fixed and variable costs with the expected number of miles you plan to drive. We suggest you revisit this figure after a few months to ensure its accuracy.
b) Rate per mile
The rate per mile is how much you can charge shippers to pull a load on a specific lane. Your rate per mile must be higher than your cost per mile; otherwise, your company will lose money. To determine the rate per mile, you must know the following:
- The industry you will support
- The freight lanes you will drive
- Your base of operations
With this information, you can go to a load board to determine how much shippers/brokers pay to pull loads in this lane. Remember to look at rates for both directions – going to and from your destination.
Examine the rates brokers offer and compare them with those of shippers. Brokers pay less than shippers since they take part of the profit as compensation. Here is a list of load boards to help you calculate this figure.
c) Is the business profitable?
Don’t make the common mistake of pulling loads without having a reliable estimate of your cost and rate per mile. It’s a guaranteed recipe for failure. You should start driving only when you have determined pricing and a strategy that gives you a solid profit.
3. Find high-paying freight loads
Knowing how to find high-paying loads is essential to the success of your trucking business. New truckers often make the mistake of trying to rely solely on load boards. After all, load boards seem so convenient. Unfortunately, these loads also have high competition and pay the least.
The right strategy to grow a trucking business is to find loads from direct shippers. This strategy leads to long-term relationships with companies that value your services and pay a reasonable rate.
The most effective way to find direct shippers is to contact them directly. Call companies in the industry you want to support and ask to speak to the shipping manager. Ask them what is needed to get onto their approved carriers list. Repeat this process often until you build a list of clients that will work with you.
Calling and visiting clients requires hard work, which is why few owner-operators do it. However, it’s the path that successful truckers recommend.
New owner-operators usually start their business with only a few direct shipping clients. Since new owner-operators have excess capacity, they use a load board to fill some of their time. This strategy is reasonable as long as they focus on their long-term objective of getting direct shipping clients.
4. Manage cash effectively
One of the challenges of working with brokers and shippers is that few offer quick pays. Instead, shippers usually ask for net-30 terms (or longer). In this scenario, you must cover the expenses of picking up and delivering the load. Then, you need to wait 30 days for the shipper to pay you.
This payment cycle limits your ability to take on new loads, especially if you are growing quickly. The number of clients you can take is limited by the size of your company’s cash reserve.
There are two possible solutions to this situation. The first option is to grow slowly and drive fewer miles per month. This strategy can help ensure that your expenses don’t exceed your revenues. The second option is to use financing, which we cover in the next section.
5. Finance growth the right way
As we discussed, growing a trucking company quickly strains your cash flow and can create problems. A simple solution to this problem is to use freight bill factoring. Factoring allows you to finance your invoices from shippers that pay in net-30 days. This solution gives you an advance you can deploy to cover immediate expenses such as fuel and repairs.
Factoring is easy to obtain, especially when compared to other solutions. Another advantage of freight bill factoring is that your financing line is tied to your invoices. Consequently, the line can adapt and increase as your business grows. To learn more, please read “What is Freight Bill Factoring?”
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